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AIG Fights BofA Mortgage Settlement

Bank of America Corp.'s fight for approval of an $8.5 billion settlement with investors over soured mortgage securities has one giant hurdle in its path: American International Group Inc. (AIG).

A hearing in New York State Court kicks off on Monday in which a judge will decide whether to approve the 2011 pact.

A decision could help the Charlotte, N.C., bank put a chunk of its financial-crisis-era litigation behind it.

But insurer AIG has sought in recent weeks to adjourn the proceeding. At the same time, AIG is pushing Bank of America to pay billions of dollars to settle other claims over mortgage-backed-securities losses.

The hearing is part of a broader battle between Bank of America, the nation's second-largest bank by assets, and AIG over which company should bear the brunt of losses suffered during the financial crisis. AIG says it has $10.5 billion worth of claims against the bank that it hopes to settle, which would help put an end to its own chapter of heavy losses suffered during the financial crisis.

For Bank of America, a settlement could cap a period of costly litigation that has weighed down its stock price for years. The bank has spent nearly $50 billion on legal costs tied to the financial crisis.

Sterne, Agee & Leach Inc. analyst Todd Hagerman said the outcome will serve as a "critical litmus test" for Bank of America in seeking to put its troubles tied to its 2008 acquisition of Countrywide Financial Corp. behind it.

A spokesman for AIG acknowledged the company is pursuing both claims simultaneously. "AIG is committed to maximizing its recovery from Bank of America through all available means, including through the exercise of its contractual rights and the pursuit of its common law fraud claims," said the spokesman.

AIG has said it would drop its objections to the $8.5 billion settlement if the bank will negotiate a larger deal to settle its $10.5 billion claim, according to people familiar with the matter. AIG spelled that out as far back as November 2011 in a letter written by AIG General Counsel Thomas Russo, according to court records.

Kathy Patrick, a partner at the law firm Gibbs & Bruns LLP who negotiated the deal on behalf of investors, told New York state Judge Barbara Kapnick in June that AIG's objections stemmed solely from the insurer's desire to extract payment on other claims.

"AIG is being obstructionist here to try to force Bank of America to settle claims that have nothing to do with this case," Ms. Patrick argued in court. She called AIG's objections to the settlement "disingenuous."

The two firms have made numerous attempts since the financial crisis to end their rift, including mediation in Boston that ended without a deal. After mediation failed, AIG filed its $10.5 billion lawsuit against Bank of America in August.

The 2011 settlement came out after nearly nine months of negotiations between a group of 22 investors who held mortgage-backed securities originally valued at $105 billion, including money manager BlackRock Inc., insurer MetLife Inc. and the Federal Reserve Bank of New York.

On completion of the deal, the trustee requested the court approve its actions, in part so that investors wouldn't be able to sue the trustee in the future.

Almost immediately after the settlement was announced, objectors to the pact spoke out, saying the trustee didn't disclose enough details about how the group reached the deal. At present, most large investors have withdrawn their objections, and AIG is the largest investor that remains an objector.